Monday, April 27, 2009

Sovereign Wealth Funds and Public Power: The Case of Norway Part IV (SWF and State Policy in Action: CSR, Israel, Burma and India)

This is the fourth of a series of five (5) essays in which the nature and character of sovereign wealth funds are considered. Specifically the essays explore whether a sovereign wealth find can form itself to the ideals expressed in emerging regulatory regimes, like the Santiago Principles, one based on the idea that states may be treated like private entities with respect to their enterprises, formally sovereign but functionally private, as long as they conform to a set of behavior expectations which are said to distinguish sovereign from private behavior. The focus of that study is the "socially responsible" SWF, using as its model the Norwegian SWF, proffered by many as the model an an ideal form of sovereign wealth fund.

Part I provides an introduction to the issues to be considered and a framework for analysis. Part II explores the conceptual and regulatory framework currently arising for the transnational regulation of SWF grounded in the idea of a critical distinction between public actors and private action for constructing a system of SWF regulation. Part III focuses on the Norwegian Funds themselves: history, legal structure, and investment principles. It looks particularly at the role of the Ethics Council in SWF investment decisions. Part IV examines the Norwegian Funds in action. It explores the nature of the Norwegian SWF's engagement with corporate social responsibility through its investments, as well as its engagement with two political situations: the Israel-Palestine conflict, and the political situation in Myanmar. Lastly it examines the use of the Norwegian Fund for purposes of promoting development and its application to issues of Norwegian macroeconomic policy in the face of the economic crisis of 2008, especially with respect to investment in India. Part V looks to the regulatory implications of the relationship between the idealized framework within which regulation is constructed and the reality of the operation of the Norwegian SWF. In particular, the following are examined: (1) The role of investment and the utility of the idealized private investor model; (2) the importance of approaches in conceptualization of regulatory options; and (3) participation versus regulation as an alternative to the Public/private model.

The entire work can be accessed by Clicking HERE.

Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment
Larry Catá Backer*

Abstract:The character of global regulation has changed dramatically over the last decade. Today, multinational corporations sometimes assert substantial regulatory power across borders, and states sometimes enter markets as participants rather than as regulators— especially when they engage in economic activity outside their borders through sovereign wealth funds (SWFs). In both cases the current transnational ordering has settled on voluntary principles based approaches to regulation. SWFs are controlled by states but seek to participate in private markets in the same way as private investment vehicles. But the difficulty has been the need to overcome the inherent sovereign character of state investment, central to the definition of SWFs. SWFs thus proceed from definition to conundrum. If SWFs are grounded in the reality of their formal connection to states, and if states are deemed sovereign in their actions, then it might be reasonable to assume that such funds could not be treated like private investment funds. To bridge that gap, it was necessary to find a way to disconnect SWFs from the state and sovereign activity, and to model private activity in a way that made it possible to construct a set of behavior principles that might produce an equivalence between SWFs and private investment vehicles. The first was accomplished by creating a functional distinction between state and SWF, a distinction unnecessary for traditional sovereign investment. The second was grounded in the presumption that there is a way of distilling the essence of private investment behaviors sufficiently precisely to distinguish those behaviors from sovereign conduct. Both are nicely captured in the Santiago Principles. Both are problematic as either as concept or in application. This paper looks closely at one example of this rising phenomenon—the socially responsible sovereign wealth fund. It focuses on a close review of one of the most influential funds, the Norwegian Government Pension Fund—Global (Statens pensjonsfond - Utland). It is among the largest and most influential SWF in the world, and the largest in Europe. The Norwegian SWF provides a particularly useful case study of the issues that are now at the center of reconceptualizations of the relationships between state and corporation, between economic and political regulation,between national and transnational legal frameworks, and between public and private legal regimes. The paper first describes conceptual and regulatory frameworks on which current policy discussions of sovereign wealth funds are undertaken. It then turns to the Norwegian funds, focusing on the history of the Norwegian fund, its legal structure and the development of its investment principles. It then looks to the way those principles were used in two distinct areas—the creation of incentives to produce changes in the behavior and culture of corporations and the response to the global financial crisis of 2008. The Norwegian SWF suggests that the rising model of SWF governance, grounded on an assumption that a state organization formally public but functionally private, acting like an idealized private investor does not work either for private investors who seek to use investment for political ends or state investment entities that purport to refrain from that sort of activity.



I. Introduction

II. Conceptual and Regulatory Framework: Public Actors, Private Action

III. The Norwegian Funds
A. History
B. Legal Structure
C. Investment Principles
IV. The Norwegian Funds in Action
A. Corporate Social Responsibility
B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis
V. Regulatory Implications
A. The role of Investment and the Utility of the Idealized Private investor Model.
B. The importance of approaches in conceptualization of regulatory options:
C. Participation versus regulation as an alternative to the Public/private model.
VI. Conclusion.



The formal organization of the Norwegian SWF produces a curious tension. It is constructed for the most part to achieve the aim of establishing a substantially autonomous investment unit, that operates free of political pressure. Yet its organization also introduces a political element into the heart of the formal organization of the management of the Global Fund, particularly in the form of the Ethics Council. This produces a certain ambiguity in Fund behavior—it operates like a private investment fund to the extent that it seeks to maximize shareholder value, but the maximization of shareholder value in this case requires the Fund be used to effect the global governance goals of the Norwegian state, an analysis to which the article turns to last.192 That ambiguity is nicely evidenced in the way in which investment policy is driven my notions of corporate social responsibility and in the way in which the Global Fund has responded to the financial crisis of 2008. Each is discussed in turn.

A. Corporate Social Responsibility and Ethics:

The formal organization of the Norwegian SWF, in both its internal and external aspects thus suggests an organization that mimics, to a substantial extent, the practices of private investment vehicles. The underlying objectives of the funds are economic or commercial—value maximization of fund assets over some certain time horizon. Yet the activities of the funds in practice suggest an interesting twist on the application of these private activity sounding norm frameworks in fact. I will briefly look at three applications of this investment policy: (1) corporate social responsibility; (2) sanctions against Israel; and (3) investment in Burma. The three suggest the way in which public and private interest may merge, and the way in which, as some critics fear, public policy can be deployed within markets.

i. Corporate Social Responsibility. Corporate social responsibility, in the form of exercising shareholder rights, is an important element of the investment strategy of the Norwegian Funds.193 The Fund management has focused on a few specific areas of corporate governance, which it has raised with entities whose equities they hold (as well as with the governments that have chartered those entities).194 For this purpose, the Bank has identified three broad areas of shareholder activism: corporate governance, children’s rights and environmental protection.195 Corporate governance is the gateway to issues of social and environmental activism.196 With respect to corporate governance, the Global Fund asserted shareholder power in two ways—by voting and through direct communications with companies.197 With respect to children’s rights, NBIM has produced a set of guidelines that describe its investor expectations “for corporate performance wit regard to preventing child labour and promoting children’s rights.”198 The object is not merely to serve as a guideline for Global Fund investment, but to influence the behavior of other investors (and thereby pressuring entities to conform to the expectations).199 The efforts, though, are framed in financial and economic terms.200 The Norges Bank environmental investor policy is particularly interesting for its conformity to an idealized private investor model. That policy is grounded on the idea that it, as an investor must “influence how companies work with or against government authorities when it comes to establishing binding climate legislation that can result in significant reductions in greenhouse gases.”201

In addition, Norges Bank has begun to work in concert with other funds, both public and private, to effect changes in the ways that governments approach environmental issues.202 The Bank also works on global legislative issues that affect corporate behavior, including accounting standards for companies in extractive industries, and the development of the United Nations Principles for Responsible Investing.203 This suggests two things. First, it suggests that the Global Fund does not adhere strictly to the ideal private investor model of the formally public/functionally private framework. Second, it appears that private funds do not limit their activities to financial and economic welfare maximization either.

Moreover, it is in the area of shareholder rights that sovereign wealth fund governance and the governance of multinational corporations meet. “The principles governing the exercise of the ownership rights of the Government Pension Fund are based on the UN Global Compact, the OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises.”204 These soft law frameworks serve as the basis of the more pointed shareholder action program developed by the Fund. “Norges Bank and Folketrygdfondet have, on the basis of these principles, defined their own principles governing the exercise of the ownership rights of the Government Pension Fund – Global and the Government Pension Fund – Norway, respectively.”205 These include three principal areas of governance:

good corporate management, with a main emphasis on owners’ rights to nominate and appoint directors, to exercise their voting rights, to trade in their equities and to exercise influence over anti-takeover mechanisms, and to receive transparent and timely information; children’s rights and health, hereunder the battle against child labour, with a main emphasis on the value chains of multi-national companies; and corporate lobbying in relation to long-term environmental problems, hereunder climate changes.206
The wide-ranging and international focus of Fund investing reflects what the Norges Bank sees as an international consensus on public and private activity within markets. That consensus rejects the distinctions between public and private activity. It focuses, instead, on a functional approach in which both public and private actors are burdened with regulatory and policy obligations.207

The corporate governance agenda of the Global Fund suggests both the private and public side of Norway’s investment strategy. The Funds use traditional methods of assertions of shareholder power with respect to their substantive and ethical agendas. These include voting, dialog with companies, cooperation with other shareholders, and external communications (with public and civil society actors). With respect to issues of shareholder activism, the Fund does not necessarily pursue the same forms of action as might be available to private shareholder. Instead, the Fund focuses on state-to-state dialog, in an attempt to obtain legal reform for targeted corporate governance issues.208 A more traditional approach, however, was applied with respect to issues of executive compensation.209 In all cases, the Fund has become far more active with respect to its holdings. The object is to ensure that all companies in which the Fund invests adheres to the Fund’s ideas of appropriate corporate governance, irrespective of the national law of the home state.210 Where such national law is incompatible with that more to the taste of the Fund, then the Fund works either to change that legal basis,211 or to work around it to the extent that the statutes permit deviation.212

ii. Israel Boycott. Various combatants in the Israel Palestine conflict and their friends and allies in Europe in general and Norway in particular have made effective use of the Ethics Guidelines to put financial and media pressure on Israeli companies. The result has been to open another front in that complex war within global financial markets in general and Norway’s Funds in particular. The most recent genesis of this strategy has been repeated efforts to seek to exclude Israeli companies and companies that do business in Israel from the investment portfolios of the Norway Funds. “The Norwegian government has responded to Israel's military offensive in the Gaza strip by asking the Council of Ethics, which advises the country's €267bn Government Pension Fund, to check that companies in which it invests in the region are not involved in human or labour rights abuses.”213

While the determination to check those companies has not produced a blanket recommendation to exclude investment in any class of companies, the Ethics Counsel had begun to report conclusions with respect to individual companies before the announcement of post Gaza incursion of 2008-2009 by Israeli forces. The Ethics Committee consideration of a complaint against the Israel Electric Corporation (“IEC”) by the Norwegian NGO, People’s Aid, and a “local group”, Palestinavenner (“Friends of Palestine”).214 These philo-Palestinian cause entities in Norway alleged that “IEC has reduced the supply of electricity to Gaza and that this amounts to a form of collective punishment of the civilian population in Gaza.”215 IEC, substantially wholly owned by the State of Israel, supplied about 60% of electricity to the Gaza territory.216 During the autumn of 2007, IEC under instructions from the Israeli Defense Ministry, reduced electricity supplies to Gaza as part of an economic blockage in response to indiscriminate rocket attacks from the military and civilian population of Gaza.217 The Ethics Commission considered two actions of public organizations. The first was a report of the United Nations Office for Coordination of Humanitarian Affairs.218 The assumptions in the report were taken seriously by the Committee.219 The second was a discussion of a decision by the Israeli Supreme Court with respect to the legality of the electricity reductions by IEC.220 “This, however, has no direct bearing on the Council’s assessment.”221 In addition, the Ethics Committee heard from the Israeli Ambassador to Norway222 and from Palestinian official sources.223

On the basis of this information, the Ethics Council first acknowledged that its forum was being used as a site for the continuation of the conflict between the Israelis and Palestinians, but that it “is the role of the Council on Ethics to consider the behaviour of companies, not possible violations of international law conducted by states or other parties.”224 It determined that the electricity supply interruption was temporary, and that it was not possible to tie the humanitarian situation in Gaza to the actions of the IEC.225 In the absence of current violation, the only issue remaining was whether there was a future unacceptable risk of future breaches.226 Because there did not appear to be a current indication of future reduction, the Council decided against a recommendation of exclusion—at least for the moment.227 The opportunity to revisit the issue arose again in the aftermath of the Israeli incursion into the Gaza Strip in the waning days of the second Bush Administration.228

It is difficult to avoid the political in this consideration. It is also harder to conceive of a state entity in this case acting beyond the wishes of the Norwegian state with respect to its involvement in the economic aspects of this war. At the same time, issues of complicity have now become much more important for investors under instruments like the OECD’s Guidelines for Multinational Corporations.229 International consensus on corporate and financial complicity in violations of international law has forced private entities to be more aware of the political consequences of private economic activity. Those obligations, and consequences, fall equally on states seeking to intervene in private markets under similar conditions. But the result is perverse—the SWF that seeks to function like a private entity is now forced to factor political consequences to its private activities. In that case, SWF would most likely look to their owner’s own political interests rather than the generalized interests in the avoidance of violations of international law.230

iii. Investment Sanctions Against Burma. In its 2007 Annual Report,231 the Ethics Council summarized its actions with respect to companies operating in Myanmar (formerly Burma).

An issue of interest in the Autumn of 2007 was the dramatic situation in Burma. In this regard, the Ministry of Finance requested the Council on Ethics to give an account of cases pertaining to investments in companies with operations in Burma. Our letter of reply, which is included in this Annual Report, shows that over a longer period of time we have monitored several companies with operations in Burma. . . . The Council’s mandate indicates that the presence in, and the generation of revenue for oppressive states cannot, in itself, be sufficient for exclusion from the Fund. There must be a more direct link between the company’s operations and the human rights violations in question. Based on our knowledge of Burma from previous and on-going studies, we assume that larger infrastructure projects in Burma imply a great risk of gross and systematic human rights violations related to such work.232

The Ethics Council first noted that the Funds had no direct investment in Burma, but that a number of companies in which the Fund invested did have operations in Burma.233 It noted that in its prior review of economic activity in Burma, in 2005, “the Council regarded, as general point of departure, that the risk of grave human rights violations in connection with construction of infrastructure in Burma is considerable. The situation has hardly improved since then. Grave human rights violations such as forced displacement of people and extensive use of forced labour can be expected.”234 The problem is not direct commission of human rights violations, but complicity in their commission of human rights violations by the Burmese government.235

The Council engaged in extensive investigations,236 some of which also relied heavily on the Norwegian diplomatic corps in Southeast Asia.237 It determined that efforts to construct a gas pipeline form Burma to China was suspect

If companies in the Fund’s portfolio were to enter into contract agreements regarding the construction of such pipelines, the Council may recommend the exclusion of these companies already from the time of entering into the agreements. Because such undertakings would most likely involve an unacceptable risk of contributing to human rights violations, it is not considered necessary to wait until the violations actually take place.”238

On the other hand, The Ethics Commission declined to recommend exclusion of the South Korean company Daewoo for the export of military hardware and technology to Burma.239 But the reasons were technical: the violations had occurred in the past, they were unlikely to recur because the officials involved had been indicted in South Korea for breach of national law.240 The Council, though did note that though the sale of technology for the production of artillery shells does not fall within the weapons prohibitions of the Guidelines, their sale to a regime determined to be repressive might still constitute a particularly serious violation of fundamental ethical norms under the Guidelines.241 Lastly, the Council warned that investigations were ongoing with respect to two other Burma related matters. The first focused on entities participating in the construction of hydroelectric power plants in Burma.242 The second involved entities involved in mining operations in Burma.243 “The Council’s work on information gathering on these topics continues.”244 Here again, the political factors that motivated the approach to the Israeli issues underlie the relationship between the Norwegian state, the Global Fund and the objects of its investment.

B. Development and Use in Macroeconomic Policy: the 2008 Financial Crisis.

The criteria for investment in companies, and perhaps ultimately for grounding activity as shareholder, suggests the way in which funds, as investors, might help shape microeconomic policy.245 But SWF may also shape macro economic policy in a way that is harder to square with the private and participatory character of these funds. To suggest the parameters of this activity within the Norwegian Funds, it is only necessary to examine the conduct of these funds during the early course of the global financial downturn that became generally recognized during the summer of 2008. The fairly fast pattern of activity by the funds is nicely indicated by the changing complexion of Norwegian fund activities from mid 2008 on.246 The changes took two forms. The first was a retreat from investments abroad to a more traditional and sovereign use of Global Fund assets to support domestic economic programs. The second was a greater focus on strategic Global Fund investment to meet the political requirements of Norway, especially with respect to investment in emerging economies. Together they suggest the limits of the formally public/functionally private model grounded on a passive private investor behavior model, especially during turbulent financial periods. Each is explored below.

i. From Outbound to Inbound Investment. In the Spring of 2008, confidence in the performance of markets worldwide leads to a suggestion that the Global Fund would change its investment strategy to increase the allocation for equity investments from 40% to 60%. 247 The article further indicates that “To facilitate such investment, Slyngstad asked the government to let the central bank-run fund take stakes of up to 15 percent in individual companies, up from a 5 percent limit. The government decided on a 10 percent limit.”248 The Ministry of Finance decided to increase the allocation to equities in the Global Fund from 40 % to 60%, with an actual increase, at the end of the third quarter, of the allocation to equities to 53 per cent”249 The expansion continued to property and property development through the summer of 2008.250 This had been a subject of discussion in the prior year and reporting to the Storting in 2007.251

At the same time, the Global Fund continued to invest heavily in the financial sector. 252 By August 2008, this had become a source of concern.253 The bottom fell out in the late summer, with the collapse of Lehman Bros, in which the Global Fund had invested heavily.254 The Global Fund, also suffered losses with the collapse of Fannie Mae and Freddie Mac, though it had better anticipated this collapse.255 These losses prompted a response from Norges Bank.256

The effects of the financial collapse were not just felt in the value of the Global Fund. It also had an effect on the ability of the Global Fund managers to pursue its conventional investment strategies.257 According to the Summary of the 2008 Q3 Report by NBIM258: the return for the quarter of -7.7 per cent – the lowest in the fund’s history. The Report noted: “The turmoil in global equity and fixed income markets has resulted in major variations in the market value of the fund. The fund’s expected absolute volatility is a statistical measure that gives a model-based estimate of “normal” variations in its market value over the coming year. Since summer 2007, market movements have been far from normal, making the model less accurate than before. Market fluctuations as measured by absolute volatility have increased since summer 2007”.259

These losses had effects on Global Fund management. By December 16, 2008, it is reported that Norway is the latest country to plan a fiscal stimulus to be rolled out in early 2009 to ramp up domestic spending. According to Ziemba, “Norway’s stance was already expansionary. Its fiscal rule allows it to spend up to 4% of the GPF’s assets (the assumed return on investment in most years) to meet its non-oil deficit.”260 At year end, Norges Bank issued a press release indicating that Norges Bank will not purchase foreign exchange for the Global Fund in January 2009. According to the press release, “the Fund’s foreign exchange requirements are partly met by the state’s direct financial interest in petroleum activities (SDFI) and partly by Norges Bank’s purchases in the market. The Ministry of Finance determined the size of the monthly allocations to the Fund.261 In addition, the Global Fund moved more aggressively to protect its assets. In December 2008, for example, “NBIM filed a law suit in Maryland in an attempt to prevent Constellation Energy Group, in which NBIM owns 4.8%, from convening a special shareholder meeting on December 23 to vote on a takeover by MidAmerican Energy Company (a unit of Berkshire Hathaway).”262 As a consequence, the Global Fund, like other SWFs began to perform more like a traditional reserve fund—sovereign and conventional—than a functionally private and separate investment vehicle. The Norwegian Fund was sovereign after all.263

But most importantly, the losses and effects of the crisis resulted in a diversion of the Global Fund assets for domestic purposes. The initial focus was on the use of the state Pension fund, rather than the Global Fund for that purpose.264 By the end of January funds otherwise allocable to the Global Fund were being diverted to fund a domestic stimulus package.265 The Global Fund appeared to be going from external investor to another source of revenue for internal sovereign purposes.

ii. From Private Investor to Strategic Investment. Thus, by the end of January 2009, the focus of the Norwegian SWF appeared to change. It had moved form the formally public/functionally private model grounded in a non interventionist private actor investment framework to another source of state funds for domestic needs. An article published by Bloomberg on January 22, 2009, suggested that “financial institutions will be unable to tap more capital from sovereign wealth funds in China, the Middle East, Norway and Russia as those funds focus on shoring up domestic markets.”266 But it had changed in ,more telling ways as well. Even as it began deploying its funds to shore up its internal economy, the Fund continued to try to use its funds for global macro economic purposes. That was in line with an assessment of the investment strategy of the Global Fund with respect to emerging economies.267 Indeed, the idea in these cases was that intervention and engagement was more suitable for these markets.268

Perhaps the most telling intervention occurred in late 2008 in India. "In a move that will bring considerable relief to Indian equity markets roiled by the global credit crisis, the Norwegian Sovereign wealth fund (SWF), plans to invest around $2 billion (about Rs9,772 crore) in India, primarily in equities, over the next two months."269 It is managing to do this not by fiat but by the manipulation of its objective investment standards, "because it has increased India's weightage in its investment portfolio."270

The Norwegian government indicated that investments would take place between October 2008 and January 2009, pending a double taxation avoidance treaty which could be ready as early as January 2009. Thorvald Moe, deputy secretary general in Norway’s ministry of finance, indicated that the Government Pension Fund’s managers recently increased India’s weight from .2 per cent to .94 per cent because they see “potential in India, though its financial markets still have a long way to go”. The investment is to take place in companies that meet the ethical standards established by the Norwegian Parliament. The article further indicates that Mr. Moe was enthusiastic about the major expansion of the sovereign fund in India, adding that this was “more than just a strategic investment”. Finally, according to the article, Mr. Moe also said Norway plans to invest more in projects that took forward the Clean Development Mechanism, as part of the Norwegian initiative on sustainable development, with special emphasis on solar energy. 271

There are at least two principle ways of characterizing this move. On the one hand, the Norwegian SWF might be in the same position as a private investor who seeks to maximize wealth through a macro economic based long term investment strategy, as Warren Buffet recently attempted to much press coverage.272 It is, in this case, acting as a private investor in markets outside of its territory--that is outside of its power to regulate. It is because the investment is undertaken both (1) in the ordinary course of such investment (that is undertaken in the same manner of that available to private investors) and (2) is not subject to regulatory leverage (the case if the investment were undertaken domestically) that one could characterize this as akin to private investment activity. And there have been great efforts to arrive at a consensus to this effect.273 But that is not the way the Indian media see it. “An SWF is a global investment fund owned by a government. Unlike a private international investment fund, which is governed by profit motives, SWF's might have national strategic objectives that have made them controversial investment vehicles.”274

And one can see why: Norwegian 'investment' will "come into the country at a time when foreign institutional investors (FIIs), the main driver of Indian stock markets, have taken out close to $11.2 billion from the country since January." Id. If the Norwegian SWF is acting counter-intuitively, then its motives must be something other than profit. Or better put, the Norwegian SWF may be wiling to accept financial losses for a greater political value vis-à-vis India. But that is not investing, that is state political activity. And in this case, this suggests that a significant (though in this case positive and welcome) intervention by one state in the internal affairs of another through the form of private participatory activity can be subsumed within the private investor model for SWFs. Or, more likely, it suggests that the private investor model, like a mask, can be put on and taken off at the whim of the sovereign seeking, on the one hand, the equal treatment of its funds with private investment vehicles, and on the other hand, greater capacity to use private markets for strategic national purposes.

It is for that reason that governments, including that of India, have viewed SWF investment as a political threat--discounting the private character of the investment as well as the power of the state to effectively regulate that private investment by foreign public organizations. That had been the position in India as late as 2007, in a speech by Reserve Bank of India Governor Y.V. Reddy.275 But that reaction has been sidelined by the hard realities of the need for cash. The poor cannot afford the scruples of the well off, even in matters of law. In India's case, "the government decided to follow the finance ministry's suggestion tat India could at this time ill afford to be picky about the kind of overseas investors who bring in money."276



192. See Part V (Regulatory Implications).

193 The Fund reported its conception of that responsibility quite directly:
investors should also share responsibility for how the companies in which they invest are conducting themselves, for what they are producing and for how they are treating the environment. The Government deems it important to integrate this type of responsibility into the management of the Government Pension Fund, because it promotes values that are important to the Norwegian people, and because it represents an important contribution to raising awareness amongst investors and companies domestically and abroad.

Ministry of Finance, Report No. 24 82006-2007) to the Sorting, On the Management of the Government Pension Fund in 2006, at ¶ 4.1.1 (The integration of ethical considerations in the management of the Government Pension Fund).

194 See Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund (Preliminary and Unofficial Translation, at 16, (“Norges Bank bases its exercise of the ownership rights of the Fund on the belief that it is better and more effective to concentrate on a few important topics than to spread the resources thinly over many areas.” Id.).

195 Id.

196 Id., at 17.

197 Id. (“At the end of 2008, Norges Bank had established or continued dialog with 16 companies concerning issues linked to corporate governance and shareholder rights. . . . In 2008, Norges Bank took part in 7, 871 general assemblies and voted on almost 70,000 issues. . . . [and] voted against 11 percent of the proposals.”).

198 Norges Bank Investment Management, NBIM Investor Expectations on Children’s Rights, available at 4. The expectations are summarized id., at 12, and include the development of a conforming corporate child labor policy, continuous risk assessment, preventive and corrective plans and actions, supply chain management systems, monitoring systems, performance testing, integration of potential economic impacts of social issues into corporate strategic planning and a transparent and well-functioning corporate governance system. Id.

199 “The NBIM Investor Expectations on Children’s Rights will serve as a reference for investors who adhere to the principles of responsible investment, and can be used as an indicator of best business practices by corporations globally. The primary function of the Expectations is not to blacklist or rank companies, but to serve as a point of departure for constructive dialogue between investors and companies, and to set a clear standard that companies globally must be expected to live up to.” Id., a 4.

200 Id., at 5-6.

201 Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On the Management of the Government Pension Fund (Preliminary and Unofficial Translation, at 17.

202 “In November 2008, Norges Bank announced that the bank was talking part in a new petition by 135 funds calling for wealthy nations to reduce their emission of greenhouse gases.” Id., at 17.

203 Id., at 18.

204 Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at Textbox 4.1.

205 Id.

206 Id., at Section 4.2.1.

207 Ministry of Finance, Norway, Report No. 20 to the Storting (2008-2009) On theManagement of the Government Pension Fund (Preliminary and Unofficial Translation, at 21 (“To maintain the Fund’s solid position as a responsible investor, the Ministry proposes that good corporate governance and environmental and social factors shall be integrated to a greater degree as relevant factors in the overall work on management of the Fund. This is in line with international developments and will entail a raised ambition level in this area.”).

208 “Norges Bank has, together with other large European investors, pursued a dialogue, through meetings and letter, with the Chairman and members of the U.S. Securities and Exchange Commission (“SEC”), concerning the importance of establishing regulations that ensure the shareholders real influence over the appointment of directors of US companies. The Bank deems progress thus far to be inadequate, and will continue to follow up on this issue in 2008.” Id.

209 The Report to Parliament explained:
Norges Bank voted against the proposals recommended by management in 25 pct. of the cases relating to remuneration. The Bank did not support the approval of remuneration plans that were not linked to actual performance, that permitted the repricing of options, that resulted in a relatively high degree of dilution of the ownership stakes of existing owners, and that were allotted at a price much lower than the market price, or that involved exaggerated pension schemes, as well as pension bonuses for Directors and auditors. Norges Bank also voted against a number of remuneration plans as the result of inadequate information.

Id., at 4.2.1.

210 “The battle to safeguard the rights and health of children is a moral imperative. In many countries national legislation, and compliance therewith, is inadequate when it comes to child labour and protection of the rights of children.” Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 119.

211 See Statement by Director General Martin Skancke, Asset Management Department, Norwegian Ministry of Finance Before The subcommittee on Domestic and International Monetary Policy, Trade and Technology and the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises The Committee on Financial Services U.S. House of Representatives Hearing on “Foreign Government Investment in the U.S. Economy and Financial Sector” March 5th 2008, at 7. In its 2007 Report, Norges Bank detailed some of its efforts in is regard with respect to American law:
The most important corporate management issue in the US last year concerned the ability of shareholders to nominate their own candidates for directorships, Norges Bank has, together with other large European investors, pursued a dialogue, through meetings and letter, with the Chairman and members of the U.S. Securities and Exchange Commission (“SEC”), concerning the importance of establishing regulations that ensure shareholders real influence over the appointment of directors of US companies.

Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 119.

212 See Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 121-123. “Norges Bank has, during the course fo 2007, initiated or continued contact with about 95 companies in the Fund’s portfolio, as part of its active ownership effort. . . . In those cases where Norges Bank identifies a company that it wishes to influence, it prepares a plan of action that defines, inter alia, the purpose of the dialogue.” Id., at 123.

213 Hugh Wheelan, Norwegian Government Fund Checks Companies for Israel Gaza Human Rights Abuses, CUPE Ontario, Jan. 8, 2009. “During 2008, the Israel equity market was included for the first time in the Norwegian fund's benchmark meaning that it has invested in a growing number of Israeli companies. Between 2006 and 2008, the Norwegian Council on Ethics on various occasions considered possible contribution to human rights violations or other ethical norms through investment in Israeli companies.” Id. 214 See Council on Ethics’ Assessment on Investments in Israel Electric Corporation, Letter from Council on Ethics, Norwegian Government Pension Fund - Global To the Ministry of Finance, April 18, 2008, available (accessed March 23, 2009), at 1. The Norwegian People’s Aid provided information of the humanitarian situation in Gaza and the privations suffered by its population. It could not, however, conform the continuation of power supply restrictions. “Here, it was stated that based on their own enquiries , Norwegian People’s Aid could still not determine that the reduction in supply of electricity had actually ceased, but that it was difficult to bring certainty to this question.” Id., at 3.

215 Id.

216 Id. at 1. The remainder is provided by Egypt and by a power plant in Gaza. Id.

217 Id. at 2. The reduction, in the amount of 0.5 megawatts, was confirmed by the U.N. Office for the Coordination of Humanitarian Affairs, focused on the Gazan side of the dispute, pursuant to its report of February 8, 2008, and considered by the Ethics Committee. Id.

218 The Report painted a grim picture for the Palestinian population of Gaza and assumed “that there has been a plan to reduce the electricity supply to Gaza as a response to rocket attacks on Israel, and that a reduction by 0.5 MW has been implemented. The report is also understood to suggest that there is an escalation plan which involves further, weekly reductions by 0.5 MW per week.” Id. at 2.

219 “Assuming, however, that there did exist a plan to escalate the rate of reductions in electricity supply, as suggested in the OCHA report, it seems clear that this plan has not been implemented.” Id., at 5.

220 “The question of legality of IEC’s reduction in electricity supply to Gaza has been the subject of a petition for temporary injunction brought before the Supreme Court of Israel. The petition is brought on by a group of private individuals and NGOs in Israel. In the Supreme Court ruling, dated January 27, 2008, it was found that the reduction in electricity supply is not unlawful.” Id., at 2.

221 Id. Instead, finding the question technically complex, the Council “assumes that, in practice, it is probably difficult to distribute the power according to humanitarian needs.” Id., at 3.

222 “The ambassador described the security situation for the civilian population of Israel which is subjected to repeated rocket attacks from Gaza. She also explained that employees of IEC have been targeted by gunfire when they have conducted maintenance work on the power lines which supply Gaza from Israel, and that Israeli power plants which produce electricity for Gaza are also targeted by rockets launched from Gaza.” Id., at 3.

223 “The Palestinian energy officials confirm that there are no ongoing reductions in the electricity supply to Gaza. The 0.5% reduction by IEC, which OCHA and other sources has referred to earlier, had in fact ceased.” Id.

224 Id., at 4. It also disregarded the connection between the State of Israel as majority shareholder of IEC. Id.

225 Id., at 4.

226 Id.

227 Id., at 5. The intellectual journey was a bit curious:
The Council finds it difficult to have a clear opinion on the likelihood of such possible, future reductions in the supply of electricity to Gaza. Companies’ past actions can, however, give indications to future behaviour. Considering the situation in general and the repeated rocket attacks against Israel, it cannot be ruled out that future situations could arise where IEC again is instructed to reduce the electricity supply to Gaza. Assuming, however, that there did exist a plan to escalate the rate of reductions in electricity supply, as suggested in the OCHA report, it seems clear that this plan has not been implemented. It also seems clear that there have been no repetition of the power cuts.

Id., at 4-5.

228 Ministry of Finance, Norway, Letter to Council of Ethics, dated January 7th , 2009, requesting an overview of the Council’s assessments of cases related to companies with activities in Israel available (accessed April 24, 2009). The Council on Ethics replied by letter dated March 19, 2009. Council on Ethics, Ministry of Finance-Norway, Letter dated April 19, 2009, on the Council's assessments of investments in companies with activities in Israel. It noted that the extent of Norwegian Fund investment in the conflict zone:
As of January, 2008, the Fund had 8 equity and 2 bond investments in Israeli companies. By January, 20 09, this number had increased to 41 equity and 2 bond investments. Investments in non-Israeli companies which may have some form of operations in Israel are not included in this figure. The extent this of is difficult to estimate.

Id. It reviewed the ouncil’s investigations to date, focusing on the issue of investment in the Israeli Electric Company. Id. It investigated the role of the Israel Electric CPOmpany in the conflict in Gaza at the end of 2008. “The Council is unaware of any recent informat ion indicating that IEC has reduced the supply of electricity to Gaza as a means of sanction. Therefore, there seem to be no grounds at present to conduct a renewed assessment of the Fund’s investment in bonds issued by IEC.” Id. It stressed the role fo the Council in assessing company rather than state behavior, but also indicated that state behavior can directly impact assessment of corporate behavior. “It is the role of the Council to assess companies’ behaviour, not possible breaches of norms by states or other parties. In states where international humanitarian law or other norms are violated, there will be an increased risk of companies’ involvement in such violations.” Id. Most importantly, however, the Council indicated a future object of investigation—one tied to the political issues of Israeli occupation of lands assumed by the world community to eventually become a Palestinian state:
The Council has, on the basis of the Guidelines’ exclusion criteria pertaining to human rights violations and violations of individual’s rights in war and conflict, assessed several Israeli companies and companies operating in Israel. A part of this analysis is to assess whether companies in the Fund have activities which can be considered supportive of violations of international humanitarian law. One area of such interest is the construction of various forms of infrastructure in occupied territories.

Id. It is here that the conflation of private and public conduct—that is of the use of the Norwegian SWF as a vehicle for the execution of political goals becomes clearer.
For a timeline of the events in the Gaza Strip during 2008, see Gaza Conflict: Key events of 2008, Sky News, Dec. 27, 2009, available (accessed April 13, 2009).

229 See discussion, supra, at text and notes 35-38.

230 This is considered in Larry Catá Backer, Case Note: Rights And Accountability In Development (Raid) V Das Air (21 July 2008) Global Witness V Afrimex (28 August 2008): Small Steps Toward An Autonomous Transnational Legal System For The Regulation Of Multinational Corporations, MELBOURNE JOURNAL OF INTERNATIONAL LAW (forthcoming 2009).

231 See, Council on Ethics Government Pension Fund—Global, Annual Report 2007 (Council on Ethics’ Assessment of Companies With Operations in Burma, id., 82-85).

232 Council on Ethics Government Pension Fund—Global, Annual Report 2007, at 5.

233 “The majority of these companies belong to the energy, mining, oil and gas, hydroelectric power, telecommunications, banking, pharmaceutical and hotel sectors. The companies are listed on, among others, the South Korean, Thai, Singaporean and French stock markets.” Id., at 82.

234 Id., at 82.

235 Id., at 83.

236 Thus, “the Council has obtained information from the concerned companies as well as from different organisations. The Council’s secretariat has also temporarily employed a staff member who, in February this year, was in the border areas between Burma and Thailand to gather information on the human rights situation related to construction projects. Also, during a visit to India in February, the secretariat sought to clarify the status of the cooperation between India and Burma for the construction of a gas pipeline.” Id., at 83

237 “in October of this year the secretariat will meet with Burmese citizens in exile, various organisations and the Norwegian embassy in Bangkok to gather additional information.” Id., at 83.

238 Id., at 84.

239 Id., at 84.

240 Id.

241 Id., referencing Guidelines ¶ 2 subpar. 3.

242 “Such projects have previously been known to lead to forced displacement of people and to forced labour.” Id., at 85.

243 “It must be assumed that conditions related to mining in Burma can be severe, both in terms of environmental aspects, working conditions and effects on livelihood for the population in proximity of the mines. Nor can it be ruled out that forced labour is used, either in the mining operations themselves or when clearing areas for new mines.” Id., at 85.

244 Id., at 85.

245 See discussion, infra, at text and notes, --; see also International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices; “Santiago Principles, (October 2008), (hereafter the “Santiago Principles”), at GAPP 3 Principle (“Since SWFs are often created for macroeconomic purposes, their operations should support and be consistent with a sound overall macroeconomic policy framework.” Id., at GAPP 3 Principles, Explanation and Commentary).

246 For a general report on these issues, see Norges Bank Investment Management, Government Pension Fund—Global Annual Report 2008, at 12-46.

247 Archer, John and Moskwa, Wojciech, Norway oil fund big buyer of stocks, eyes new deals, Reuters (Oslo), May 29, 2008. The article indicates that the fund is shifting to a 60 percent allocation in stocks from 40 percent, and that just over 50 percent of the equity portfolio is in Europe. The article indicates that Norway’s SWF is buying equities and selling bonds to make this transition. According to the article, Mr. Slyngstad [the NBIM manager] indicated that the fund’s subprime exposure “is minimal, less than .4 percent of the fund... We regard volatile markets as ... an opportunity”. Also, according to Mr. Slyngstad, the fund has been approached to take part in “quite a few deals” and he has formed a special division (Capital Strategy Division) to invest larger, more concentrated equity stakes in companies: "That would represent a new departure for the fund -- concentrated large ownership, quite likely for a longer period -- using our size and our longer investment horizon.. If for some reason we would participate in a recapitalization of a large bank with a large stake, basically this group would be doing it... A fund of our size is quite likely to have been shown quite a few deals ... I wouldn't say that we have not participated, but I won't confirm that we have either".

248 Id.

249 Norges Bank, Substantial market fluctuations and considerable uncertainty, Press
Release Published November 25, 2008.

250 Chanjaroen, Chanyaporn, Helical Bar in Talks Over Potential Takeover, Observer Reports,, August 3, 2008. Chanyaporn Chanjaroen of Bloomberg reported on August 3, 2008 that according to the Observer, Helical Bar Plc was “in talks with Norway’s sovereign wealth fund which may lead to a takeover of the U.K. property developer”, according to an unidentified person close to the company. According to the news report, the discussions were preliminary and could result in a large cash injection for the company. “The Norwegian fund considered appointing Helical Bar Chief Executive Officer Michael Slade to run its European property investments.” However, a spokesman for helical Bar had declined to comment. Id.

251 See, Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007 (2008), at 23-25.

252 Gore Gareth, Norway State fund Buys Banco Santander Stake, Economist Says,, August 20, 2008. Bloomberg widely circulated a news update by Gareth Gore on August 20, 2008 indicating that El Economista newspaper reported that Norway’s sovereign wealth fund bought 800 million-euro ($1.8 billion) stake in Spain’s lender Banco Santander SA according to the state-managed investment fund. According to El Economista, “Norges Bank purchased a 1.12 percent stake I in the lender. Also, according to the news report, the fund bought a 5.08 percent stake in May, valued at 300 million euros in the Santander’s Sovereign Bancorp Inc.’s union . Id.

253 Berglund, Nina, Oil fund takes ‘minor’ hit from US mortgage crisis, Aftenposten English Web Desk/Reuters, August 26, 2008. The article mentioned Norway’s SWF exposure in the US mortgage companies Fannie Mae and Freddie Mac. According to the article, Yngve Slyngstad indicated that the fund's total Fannie Mae and Freddie Mac exposure amounts to about NOK 88 billion (USD 16.36 billion): "Eighty-eight billion (crowns) is relatively little in relation to other central banks, but it is that big because we consider this the second most secure investment in the United States," Slyngstad said. The oil fund's holdings in Fannie Mae and Freddie Mac bonds have fallen from a value of NOK 129 billion at the end of 200, Slyngstad said while releasing the fund's second-quarter results. The fund, formally called The Government Pension Fund -- Global, grew by 2.4 percent in the second quarter from the first, reaching NOK 1.992 trillion (USD 370.8 billion) though it had a negative return on investment. The fund's return was a negative 1.9 percent in the second quarter, hit by turmoil in financial markets.”

254 Moskwa, Wojciech and Knudsen, Camilla, Norway’s wealth fund says was prepared for Lehman, Reuters (Oslo), September 15, 2008. They reported that Norway’s SWF was prepared for the bankruptcy filing by U.S. bank Lehman Brothers, in which the fund held more than $840 million worth of stocks and bonds at the end of 2007. According to the article, the Government Pension Fund – Global owned .27 percent equity stake in Lehman Brothers at the end of 2007 worth $88.78 million, and it held Lehman Brothers Holdings Inc. fixed income securities worth 4.38 billion browns. The fund also held approximately 1.55 billion crowns of debt from other Lehman vehicles. Id.

255 Interview by Gregory Roth with Yngve Slyngstad, Chief Executive, Norway Government Pension Fund – Global, Norway (Published September 26, 2008). The report indicated that indicated that over the first six months of 2008, the fund reduced its holdings of Fannie Mae and Freddie Mac debt by almost a third. “Does this reflect a loss of confidence in the debt of these two lending giants, which are now backed explicitly by the United States government?” asked Mr. Roth “It doesn’t reflect a lack of confidence in these institutions or the U.S. system. I think you rather have to say that there are other investment opportunities in the United States that may look equally attractive or more attractive for the moment” said Mr. Slyngstad. But there was no further elaboration on this issue.

256 Mr. Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM), made the following remarks when commenting on the performance of the fund in a November 25, 2008 press release published by Norges Bank:
“the third quarter of 2008 was an unusually demanding quarter for the management of the Government Pension Fund – Global. Uncertainty in financial markets increased dramatically, and this affected the return on the fund. The return on the fund in the third quarter was -7.7 per cent in international currency. The return on the fund was 1.8 percentage points lower than that on the benchmark portfolio defined by the Ministry of Finance.”

Norges Bank, Substantial market fluctuations and considerable uncertainty, Press
Release issued November 25, 2008.

257 Ibison, David, Norway set to dip into $332bn oil fund, Financial, Global Economy, December 15, 2008. By December 14, 2008, David Ibison reported in the Financial that Norway would tap its sovereign wealth fund in January 2009 to finance a new fiscal spending package in order to offset the rapid slowdown in Norway’s economic growth next year. The article mentions the following statements by Jens Stoltenberg, Norway’s prime minister: “Jens Stoltenberg, Norway's leftwing prime minister, said in an interview the government will unveil spending measures in January on top of its previously announced expansionary budget for 2009.” We have held back and been restrictive in our use of oil revenues in strong times but we can start to spend more now that we see a downturn coming," he said. " Id.

258 Norges Bank, Quarterly Report Q3 [2008].

259 Id.

260 Ziemba, Rachel, Raiding The Sovereign Rainy Day Fund, RGE Analysts EconoMonitor, December 16, 2008. The report also noted that “Norway could have to draw on its principal not just on the income on its investments.” Id.

261 Norges Bank, Norges Bank Foreign Exchange Purchases in January 2009, Press Release, December 31, 2008. Norges Bank’s purchases of foreign exchange are equal to the difference between the allocations and the SDFI’s estimated foreign exchange revenues. Adjustments are made for any revisions of estimates for the previous month. As a result, the daily purchases may vary from one month to the next. The daily foreign exchange purchases are determined for a period of one month at a time and are published on the last business day of the preceding month.” Id.

262 Norges Bank, NBIM seeks court decision to delay Constellation shareholder vote on acquisition by MidAmerican, Press Release, December 17, 2008, at: (accessed Feb. 1, 2009). According to Anne Kvam, the Head of NBIM Corporate Governance ““We are one of the biggest shareholders and take these necessary steps in order to safeguard our financial interests. In our opinion, the MidAmerican agreement undervalues Constellation, and we expect the board to work for a solution that offers the highest value opportunity.” Id.

263 Id. “The escalation of the financial crisis and collapse of commodity prices likely only accelerated the trend in which sovereign funds or the governments that sponsor them are increasing their spending at home. Many other funds have also announced support of their financial sector or fiscal stimulus to support growth.” Id. 264 China View, PM: Norway to spend more oil money in 2009 to deal with financial crisis, Business, Special Report: Global Financial Crisis, January 7, 2009 (Stockholm). A January 8, 2009 article published by China View indicates that Norway will spend more money from the state pension fund to support the economy in the global financial crisis. Norwegian Prime Minister Jens Stoltenberg is quoted saying “In 2009 we will use much more of the oil income than justified by the expected returns from the pension fund” in a speech at the Annual Conference of the Confederation of Norwegian Enterprise. Also, Mr. Stoltenberg indicated that the government could use up to 4 percent of the $300 billion dollar pension fund and that “the cash would be used for boosting employment and securing Norway’s generous welfare state”. This decision will be presented on January 26, 2009. According to the article, in the meantime, the government has pledged a fiscal stimulus package this month to keep Norway’s sharply slowing economy from recession”. Id.

265 Norway “unveiled a NKr20bn ($3bn, €2.25bn) fiscal stimulus package as it starts to use its massive oil wealth to boost growth and employment in its struggling economy. The Nordic country of just 4.7m people has amassed $370bn in oil revenues – the world’s second largest sovereign wealth fund, after Abu Dhabi’s – and is now starting to use it to soften the effects of an expected recession.” David Ibsen, Norway Dips Into Oil Fund for NKr20Bn Stimulus, Financial Times, Jan. 26, 2009 (“The new spending package comes on top of a previously announced expansionary budget that was equivalent to 0.7 per cent of gross domestic product and takes total government spending on the crisis to 2.3 per cent of GDP – one of the most aggressive spending plans in Europe.” Id.).

266 Hu, Bei, Financial Firms Need $1 Trillion More in Equity, Rajpal Says,, January 22, 2009.

267 See, Norwegian Ministry of Finance, Report No. 16 (2007-2008) to the Sorting On the Management of the Government Pension Fund in 2007, at 98-112.

268 “It is further suggested that corporate governance criteria should not be decisive for purposes of the inclusion or exclusions of markets in or from the investment universe or the benchmark portfolio. The Bank is of the view that the best corporate governance effects are achieved through presence and active involvement, and that such effects will in large part concern company specific matters.” Id., at 110.”

269 Sanjiv Shankaran, Norway Fund to Put $2 Bn in India, (India), Oct. 22, 2008).

270 Id.

271 Business Standard Reporter/New Delhi, Norway fund to invest $2b in Indian stocks as foreign institutional investors flee..., Business Standard, October 22, 2008.

272 See discussion, infra text and notes --. 273 See Larry Catá Backer, Sovereign Wealth Funds: A Smattering of Opinions that Count But Perhaps Ought Not, LAW AT THE END OF THE DAY, August 22, 2008.

274 Sanjiv Shankaran, Norway Fund, supra.

275 “India has a stake in the on-going debate by virtue of its increasing importance in global capital flows. The critical issue relates to standards of governance and transparency that are adopted by such funds and the extent of comfort that investee countries have in this regard,” Reddy said.” Sanjiv Shankaran, Centre Puts SWFs Under the Scanner, (India), March 10, 2008.

276 Sanjiv Shankaran, Norway Fund, supra.

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